The state of utility regulation: Mostly bad news for the biscuit cookers

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Remember when Arkansas politicians won their stripes fighting utility rate increases? When the populists looked out for the "biscuit cookers" against the monopoly utility barons? Ernest Dumas does

Dumas writes this week about the sea change in Arkansas law by the Republican legislature — in favor of the utilities, particularly the electric utilities. But ..... his account of the current state of affairs includes some kind words for continued consumer advocacy by the office of Attorney General Leslie Rutledge against the new law and a Republican-controlled Public Service Commission in a current Entergy rate case that seeks to double the company's current profit margin.

By Ernest Dumas

When we left Arkansas’s intrepid utility regulators in June they were facing their first test with Arkansas’s brave new utility rate reform law, which seeks to guarantee utilities higher rates for their electricity and gas but to soften the effect on big industries that use lots of power by shifting their costs to homeowners and small businesses.

Let’s see how things are going down in Entergy Arkansas’s request for $167 million in new revenues and regular annual increases thereafter. All the stakeholders in the case have shown their hands in a thousand pages of testimony at the Public Service Commission, which will render its decision late this winter.

You may remember that Act 725, obviously designed by Entergy, slid through the legislature last spring with virtually no stir or debate. It sharply overhauls the way the state has regulated rate increases by utilities since the 1930s. Utility rates once were big issues and a politician’s fortunes—let’s mention Jim Guy Tucker, Bill Clinton, Frank White and the much earlier Francis Cherry—rose and fell on how they handled big utility issues like the Grand Gulf nuclear project in Mississippi that hit everybody’s pocketbook. Not so much anymore.

It may be unfair to say that Act 725, which favors utilities and the big industries that consume vast amounts of gas and electricity, is a product of the sudden domination of the legislature by the Republican Party, but it surely helped. The law’s sponsor, though not its author, is Rep. Charlie Collins, Republican of Fayetteville, who is on the House Insurance and Commerce Committee, which handles utility legislation.

As I have noted previously, the 2015 legislature has been unusually generous to big industry, offering to bolster Lockheed Martin’s profits with $120 million from Arkansas taxpayers if it won a big defense contract to build military vehicles in Arkansas (the company didn’t win) and referred a constitutional amendment that will remove all limits on taxpayer grants to big industries and allow cities to legally cut chambers of commerce in on the taxpayers’ generosity.

The act alters the ratemaking process in both subtle and blatant ways, all of which are likely to mean that your electricity and gas bills are going to rise and far more often than in the past. It encourages the PSC to allow utilities to charge customers high enough rates to give utilities a higher return for their shareholders’ investment, called return on equity. It encourages the PSC to establish a rate structure that shifts costs from big energy users like Tyson Foods and the Koch Brothers’ Georgia Pacific paper plants to homeowners and small businesses. For the first time, the law now allows Entergy and other utilities to get a rate increase every year to recover their old and future costs rather than periodically filing a rate request and going through the cumbersome process like the one going on at the PSC now.

In his testimony, Hugh McDonald, Entergy Arkansas’s CEO, generously praised the legislature for its farsightedness in passing Act 725 because the old system of cumbersome rate cases was no longer relevant to the fast-paced world of business. Utilities can now file a formula rate review plan that allows them to get new rates every year by filing data about their current and prospective costs with the PSC. The staff and other interested parties can file objections for a short period before the PSC allows the new rates to take effect. Soon after the higher rates from the current proceeding take effect next year, Entergy will file its 2016 formula plan for another rate adjustment.

McDonald and other company experts also praise the new law’s emphasis on giving big industries a break at the expense of other ratepayers. McDonald, Vice President Mike Maulden and Grant Tennille, the former director of the Arkansas Economic Development Commission, testified that lower energy costs for big users would bring new industries into the state and create lots of new jobs, which would be good for everyone, including the homeowners and small businesses that will bear the brunt of higher rates.

The company wants the PSC to allow it a much bigger return on shareholders’ equity than the 9.5 percent the PSC nominally allowed in its last rate case, which McDonald said panned out to be only about 5 percent this year, which is about the lowest in all of regulated industries. The company wants 10.2 percent.

A big question has been how the traditional adversaries, the attorney general and the PSC staff, who are supposed to look after the interests of all ratepayers, would interpret the law and treat the company’s requests. Attorneys general since Jim Guy Tucker in the 1970s have been adversaries, particularly in fighting the transfer of big industries’s energy costs to homes and small businesses.

Leslie Rutledge, the new attorney general, has distinguished herself as a friend to big industries like the Koch brothers and the utilities by opposing all federal rules to require them to clean up poisonous emissions from plants. It should be said that Entergy, while no doubt welcoming Rutledge’s efforts, has moved on its own to meet clean-air and smokestack rules.

Remarkably, Rutledge so far has followed the example of her predecessors by opposing the cost shift to homeowners and small businesses and the company’s proposed return on equity. Her experts ridicule the company’s and big industries’ theories that lower rates for big users will bring a flood of new industries and jobs to the state. An economist at Louisiana State University said it likely would create few, if any, new jobs and that the economic harm to general ratepayers from absorbing big industries’ costs would more than offset any economic development. But the attorney general and the staff are softer on the annual rate review, apparently because the law now seems to demand it.

The test will be in the private settlement negotiations that will start next month. Will the ratepayers’ voice be heard there?